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Riding the tech bubble to lose it all in real estate

Entrepreneur John McAfee's story weaves through not one, but two bubbles that defined the economy as the old millennium ended and the new one began.
/ Source: CNBC

Entrepreneur John McAfee built his fortune in California's Silicon Valley and lost it almost everywhere else. His story weaves through not one, but two bubbles that defined the economy as the old millennium ended and the new one began.

He rode the technology bubble, starting a company named McAfee, whose anti-virus software is on more than 100 million computers around the world.

By the end of the ’90s he was a very rich man. “I had really more money than a person [can] reasonably be expected to spend,” he said.

With a fortune reported to be in excess of $100 million, he bought some property in Utah and doubled and tripled his money in a matter of months. His passion for real estate became all consuming as he amassed a trove of high-end properties across the United States.

McAfee, like many people in the country, got hooked on flipping properties for profit. But while he was using his own cash to buy, most homeowners were taking loans from banks and mortgage companies to get in on the American dream.

Without realizing it, McAfee was riding a second bubble: the greatest real estate bubble the United States has ever seen.

His luck was about to run out.

‘There was going to be a correction’
An era of low interest rates had made home loans very affordable in the middle of the 2000s. That plus a growing appetite among international investors for securities made up of residential and commercial mortgages kept money flooding into the housing market.

For developers like Ken Tersini, of San Jose, that deluge made the sky the limit. He and his partners broke ground on The Axis, a luxury high-rise with condominiums for sale that ranged from $400,000 and $2 million.

“There was a tremendous volume of capital that was looking to get into the market and that paved the way for this project and a couple of the other projects in San Jose to get started,” he said. “We were halfway through the construction phase and my partner and I looked at each other and we said I sure wish we were selling product today,” Tersini said, “You could sense that the market had overheated and you knew there was going to be a correction.”

He was right. The Axis opened in the fall of 2007. By then it was too late.

When borrowers started to have trouble paying mortgages back, the ocean of financing dried up. Without easy money, buyers became scarce and housing prices started coming down.

Today 70 percent of the 329 condominiums are still vacant.

Tersini, a third-generation developer whose grandfather started pouring concrete in California 70 years ago, is still muddling through. Others have not been as lucky.

‘A complete roller coaster’
In every part of the country, residential and commercial real estate has come down sharply in price, sometimes with catastrophic results.

Darcy Stacom, one of the most powerful brokers in one of the most important markets has seen the highs and the lows of the real estate boom.

She is the vice chairman for CB Richard Ellis, a firm that hit $50 billion in sales at the height of the market and will close out the year at $3 billion.

“It was a complete roller coaster, if you think about it,” she said.

In 2006, Stacom, sold the single most expensive piece of real estate in U.S. history: MetLife’s massive property on the island of Manhattan known as Stuyvesant Town for $5.4 billion.

Tishman Speyer won the bidding and had no problem getting $4.4 billion in loans to help pay for it.

Three years later, Tishman Speyer lost all the cash it put into the deal and a whole lot more. Current estimates are that the development is now worth less than half the $5.4 billion purchase price.

McAfee presses on
John McAfee can commiserate with Tishman Speyer’s partners.

When his financial holdings plummeted in value after the bankruptcy of Lehman Brothers, he found himself short of cash and was forced to sell all of his properties at the worst possible time.

He sold his $20 million Colorado estate for $5 million. And the multimillion dollar Hawaiian home that took 10 years to build sold for $1.5 million.

He said his largest loss was a New Mexico property that included a personal home, a movie theater, a café and a flying school. He paid about $10 million to build it. It sold for $1.3 million.

McAfee, a beneficiary of one bubble and the victim of another, said he was happy to have lived through them both.

“Would it be better for you, for example, to get … [what] you've always wanted, and you stay with that and your life is static .. or life comes in and says, ‘Now, that was fun for ten years. Now try this on.’ I'll take the second,” he said.

Today he navigates the jungle waters in the tiny Central American country he calls home: Belize. The 65 year old is still doing what comes naturally: starting new businesses.